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These course materials for undergraduate intermediate macroeconomics at MIT in the Spring term of the 1960/61 academic year are clearly identified as being for a course taught by Franco Modigliani. As it happens from time to time, one finds syllabi and reading lists in the files of colleagues and not just in the papers of students who took the course or the professors who taught them. These materials from reading list through class-assignments, term-paper assignment, up to and including the final examination all come from Robert Solow’s papers at the Duke University library’s Economists’ Papers Project.
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14.05 Economic Fluctuations and Growth
Prereq.: 14.02
Year: U(1,2) 3-0-5
Analytical study of determinants of national income level, employment, and prices; study of their fluctuations and long-run trends. Consideration of historical and current behavior of the economic system, and role of stabilization policies.
Modigliani
Source: Massachusetts Institute of Technology Bulletin. The General Catalogue Issue for the Centennial Year 1960-61. p. 240.
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Spring, 1961
Professor Modigliani
14.05—Economic Fluctuations and Growth
READING LIST
Suggested Purchases: Dernburg & McDougall, Macro-Economics (1960)—(referred to below as D&M)
US Department of Commerce, U.S. Income and Output (1958)
Federal Reserve Chart Book, Historical Supplement (1960)
Review references in each section are to Samuelson, Economics (4th ed., 1958)
I. Introduction
Review: Samuelson, Ch. 1
New: D&M, Ch. 1
Friedman: Essays in Positive Economics, pp. 1-30.
II. National Income and Other Measures of Economic Activity.
Review: Samuelson, Ch. 10
New: D&M, Ch. 1-5
Hart, Money, Debt, and Economic Activity (2nd ed., pp. 167-171)
G. Moore, Statistical Indicators of Cyclical Revivals and Recessions, pp. 1-20, 63-77
Survey of Current Business—“The Business Situation” in a recent issue, and look at annual review in February, 1960, number.
References: For current business conditions and course problems, get acquainted with the following, by examining thoroughly at least one recent issue:
Survey of Current Business (monthly; annual summary in February; National Income issue in July)
Federal Reserve Bulletin (monthly)
Economic Indicators (monthly; historical supplement, 1957)
See Bratt, Business Cycles and Forecasting (1953), Chapter 15, for additional source material
III. The Supply of Money and the Banking System.
Review: Samuelson, Chap. 15 and Appendix, 16.
New: Hart, Money, Debt, etc., Ch. 4 and 6.
Federal Reserve System: Purposes and Functions
IV. The Determinants of the Level of National Income.
A. Monetary Approaches
Review: Samuelson, Ch. 14 and Appendix
New: D&M, Ch. 9
Hart, Money, Debt, Ch. 10, 12
B. The Theory of Effective Demand
Review: Samuelson, Ch. 11, 12
New: D&M, Ch. 6, 7
Hart, Money, Debt, Ch. 11, pp. 167-179
(optional) Modigliani & Brumberg, “Utility Analysis and the Consumption Function”, in Post-Keynesian Economics (esp. pp. 388-418)
(optional) Ando, “Aggregative Implications of the Modigliani-Brumberg Consumption Function” (mimeographed), pp. 1-118 and Summary
V. Cyclical Fluctuations and Growth.
A. Nature and Causes of Economic Fluctuations
Review: Samuelson, Ch. 13
New: D&M, Ch 19, Section 1-3
Metzler, “The Nature and Stability of Inventory Cycles”, Review of Economics and Statistics, 1941-42
Modigliani, “Business Reasons for Holding Inventories and their Macro-economic Implications”, pp. 495-506
Modigliani, “Discussion of Hickman on Capacity, Capacity Utilization and the Acceleration Principle”, pp. 450-463 N.B.E.R. reprint
Cobren, “Inventories in Postwar Business Cycles”, Survey of Current Business, April, 1959
Tinbergen, The Dynamics of Business Cycles, Ch. 13
Hicks, Trade Cycle, Ch. 8, 9 (optional)
Fortune, series on the capital goods market in August, September, November, and December, 1958. (Sample, especially December issue.)
References only: Summaries of historical development of business cycle theories: Haberler, Prosperity and Depression, Part I.
B. Growth and its Interrelation with Cycles
D&M Ch. 16, 17
Abramovitz, Resource and Output Trends in the U.S. since 1870
(optional) Ando & Modigliani, “Growth Fluctuations and Stability”, AER, May 1959, pp. 501-524
Bratt, Business Cycles and Forecasting (1953 ed.), Ch. 3
“A New Look at Production Growth Rates”, in Survey of Current Business, April 1957
Fortune, “The Market of the 1960’s” (series of 9 articles, Jan.-Sept. 1959) (Sample, esp. April issue)
Committee for Economic Development, Economic Growth in the United States (hurriedly)
VI. Business Forecasting.
Charles Roos, “Survey of Economics Forecasting Techniques”, Econometrica, October 1955
Moore, Statistical Indicators of Cyclical Revivals and Recessions, pp. 63-77 (National Bureau of Economic Research Method)
Moore, Measuring Recessions, esp. pp. 259-272
Sidney S. Alexander, “Rate of Change Approaches to Forecasting—Diffusion Indexes and First Differences”, The Economic Journal, June 1958
Fortune, “The Business Roundup”, January 1960
“1959 Survey of Consumer Finances”, Federal Reserve Bulletin, July and September 1959 (note supplementary tables)
Klein & Lansing, “Decisions to Purchase Consumer Durable Goods”, Journal of Marketing, October 1955
Fortune, series cited above on “The Market of the 1960’s” and on “The Coming Capital Goods Boom”
Modigliani & Weingartner, “Forecasting Uses of Anticipatory Data on Investment and Sales”
Bassie, Economic Forecasting (good general reference)
Abramson and Mack, Business Forecasting in Practice (for reference)
VII. Public Policy and Economic Stabilization.
A. Synthesis of Monetary and Income Analysis
Review: Samuelson, Ch. 17
New: D&M, Ch. 8, 9, 10
B. Monetary Policy
D&M, Ch. 11
United States Monetary Policy (American Assembly) –(esp. Ch. 1, 2, 4, 6)
Friedman, “The Supply of Money and Changes in Output”, in The Relationship of Prices to Economic Stability and Growth (Joint Econ. Committee)
Bach, “The Economics and Politics of Money”, Harvard Business Review 1953 (reprint)
Committee on the Economic Report (Patman Subcommittee)—Replies pp. 368-384, 402-428 (for reference)
C. Fiscal and Debt Policy
Review: Samuelson, Ch. 18
New: D&M, Ch. 20, 21
The Federal Budget in Brief for Fiscal 1961 (get acquainted; copy of complete budget also on reserve)
Committee on Economic Development, Taxes and the Budget; also reprinted in Readings in Fiscal Policy (Parts I and II only)
Committee on Economic Development, The Budget and Economic Growth
Samuelson, “The New Look in Tax and Fiscal Policy”, in Federal Tax Policy for Economic Growth and Stability, pp. 229-34
Butters, “Taxation, Incentives, and Financial Capacity”, in Readings in Fiscal Policy
McCracken, “The Debt Problem and Economic Growth”, Michigan Business Review, November 1956
D. Wages, Productivity, Prices, and Inflation
D&M, Ch. 12, 14, 18
Wages, Prices, Profits and Productivity, American Assembly, (esp. Ch. 1, 3, 4, 6)
E. Overall Stabilization Policy and Economic Growth.
Friedman, “Framework for Monetary-Fiscal Stability”, Readings in Monetary Theory, OR;
Bach, “Monetary-Fiscal Policy Reconsidered”, Readings in Fiscal Policy
Rockefeller Committee, The Challenge to America
C. E. D. Defense Against Inflation, July 1958
Eckstein, “Inflation, the Wage-Price Spiral, and Economic Growth”, in The Relationship of Prices to Economic Stability and Growth (Joint Economic Committee)
Bach, Inflation, Ch. 2, 4
Samuelson and Solow, “Analytical Aspects of Anti-Inflation Policy”, AER May 1959 (reprint)
VIII. International Aspects.
Review: Samuelson, Ch. 31 and Appendix
New: D&M, Ch. 15
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Spring 1961
Professor Modigliani
14.05 – Economic Fluctuations and Growth
GUIDE SHEET TO BASIC ECONOMIC DATA SOURCES.
BASIC HISTORICAL INFORMATION:
Historical Statistics of the United States Colonial Times to 1952 (U. S. Government Printing Office) – Data on all major economic and many social areas, with descriptions of series.
U. S. Income and Output – A Supplement to the Survey of Current Business, providing data of all components of gross national product, 1929-1957.
Banking and Monetary Statistics, 1860-1941 (Board of Governors, Federal Reserve System)-More detailed series on money and banking, with descriptions of series.
The Economic Almanac (published annually by the National Industrial Conference Board) – each issue repeats large amount of historical data, some back to 1790. Several of these series go back further than the official government series; as such, they are often less accurate because of the less adequate coverage of the series and larger likely estimating errors involved.
(U. S. Census (U. S. Government Printing Office) – Vast amounts of data on most aspects of the economic life of business and individual, reaching back to 1790. Difficult to use without assistance or experience.
CURRENT DATA – OFFICIAL SOURCES
Survey of Current Business (U. S. Department of Commerce, monthly) – The most complete source of basic economic data, plus objective analyses of various economic developments. An annual survey is published each year in the February issue, and Annual Statistical Supplements have been issued in several recent years, which provide the data in more easily usable form than do most of the monthly issues.*
Federal Reserve Bulletin (Board of Governors, Federal Reserve System, monthly) – The basic source of current official monetary and banking data, plus monthly analyses of monetary developments.
Monthly Labor Review (U. S. Department of Labor) – The basic source of current official data on labor and on price movements, plus monthly analyses of developments in these areas.
Statistical Abstract of the U. S. (U. S. Government Printing Office, annually) – The basic annual compilation of all U. S. Government statistical data; corresponds to the Historical Statistics of the United States, above.
*Business Statistics, 1959 Biennial Edition – The latest major supplement to the Survey. It includes all major series published in the Survey, from 1929 through 1958 in most cases.
CURRENT DATA AND ANALYSES—UNOFFICIAL
There are a vast number of analyses of current economic developments published. Among the more widely recognized as careful and influential are:
Monthly Letter of the National City Bank of New York – General business conditions and financial conditions.
Fortune Magazine (monthly) – Current business analyses and industry studies, written from a relatively “liberal” business slant.
The Conference Board Business Record (National Industrial Conference Board, monthly) – Briefly analyzes current developments; more conservative than Fortune.
CURRENT EVENTS—NEWSPAPERS
Three newspapers are widely thought to provide the most complete coverage of current economic events. They are:
New York Times (daily and Sunday) – Provides the most complete coverage of current economic events.
New York Herald-Tribune (daily and Sunday) – The Times’ closest rival.
Wall Street Journal (daily) – Leading financial and business paper. Complete daily data on most important markets; also includes many speculative news stories and analyses of current and expected developments.
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Spring, 1961
Professor Modigliani
14.05-Economic Fluctuations and Growth
WRITTEN ASSIGNMENTS
I. Due Monday, February 13
“Inflation erodes the purchasing power of the dollar, robs the average man, and lowers the national standard of living. These results are pernicious and disastrous. Inflation must be avoided.” (Excerpt from recent statement by U. S. Senator)
Do you agree with the Senator? Why or why not?
II. Due Friday, September 17
Prepare a brief report (two to three pages) on the current business conditions and the outlook for the next six to twelve months.
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Spring, 1961
Professor Modigliani
14.05-Economic Fluctuations and Growth
WRITTEN ASSIGNMENT
III. Due February 24
Economists as well as politicians are very much concerned with the overall burden of taxes, or share of the nation’s income taxed away by the government.
Using as a framework for National Income Accounts of the Department of Commerce, state and defend what seems to you the most useful and meaningful measure of the “share of the nation’s income taken by the government” (paying attention to the numerator as well as to the denominator). Compute this year for 1948 and 1957.
Is the above concept identical with the “share of the nation’s output of goods and services consumed by the government”? If not, define the second concept and measure this year for the same two years.
Include any comments that may be suggested by your empirical findings.
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Spring, 1961
Professor Modigliani
14.05-Economic Fluctuations and Growth
WRITTEN ASSIGNMENT
IV. Due March 6
In a small, completely isolated economy (i.e., no foreign trade with money-using habits comparable to those of the U. S., there are four identical banks. Each bank’s balance sheet is as follows:
| Cash | $3,000,000 | Deposits | $8,000,000 |
| Loans | 2,000,000 | ||
| Government Securities | 5,000,000 | Capital and Surplus | 2,000,000 |
| $10,000,000 | $10,000,000 |
The law prescribes that banks must hold a 20% cash reserve against deposits. There is no central bank.
(a) A customer of bank letter a minds $1 million of gold (considered as cash for reserve purposes) and deposits it in his bank. Trace through any likely expansion of the money supply by Bank Letter a and by the entire banking system. What would be the maximum expansion possible?
Specify clearly any assumptions that you make, and state your reasoning carefully and precisely.
(b) Is the banking system in a more or less sound position after the gold deposit in any consequences you have predicted above? Explain why or why not.
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Spring, 1961
Professor Modigliani
14.05-Economic Fluctuations and Growth
WRITTEN ASSIGNMENT
V. Due March 10
In 196X the Federal Government will collect about 85 billion in taxes, according to present estimates, which also indicate that the money will be used roughly as follows:
| Regular government expenses | $77 billion |
| Repayment of government debt | |
| …..Held by commercial banks | 3 billion |
| …..Held by individuals and businesses other than banks | 5 billion |
Suppose these estimates are accurate, and assume it Government deposits are carried out with the commercial banks.
a. What will be the effect of these operations on the amount of money (current and deposits) owned by the public (including individuals and businesses other than banks)?
b. What will be the effect on the amount of total liquid assets (money plus government securities) owned by the public?
c. How, if at all, would your answers to (a) and (b) have been different if:
(1) All bonds paid off had been owned by commercial banks.
(2) All months paid off had been owned by the Federal Reserve Banks.
d. What generalization, if any, can you draw from this reasoning as to the most effective means of retiring the government debt, if the main aim is to alleviate inflationary pressure.
Explained concisely the reasoning by which to obtain the answers given.
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14.05-Economic Fluctuations and Growth
TERM PAPER—DUE MAY 15, 1961
Write an essay on the postwar “creeping inflation” in the U.S. – Its nature, causes and possible remedies. The essay should review the major explanations that have been advanced (e.g. cost-push and demand-poll); assess their usefulness in the light of the empirical evidence; and provide a formulation of your own conclusions and the evidence which supports them. It should further examine the implications of your analysis with respect to the outlook for price stability in the years immediately ahead.
The following items have been placed on reserve in Dewey Library to serve as a starting point, you should feel free to trace and use other references.
Books
American Assembly, Wages, Productivity, Prices, and Inflation
American Assembly, Wages, Prices, Profits and Productivity
Bowen, W. G., The Wage–Price Issue
Pamphlets, Monographs, Periodicals, etc.
Bowen, W. G., “Wage Behavior in the Postwar Period”, monograph, Industrial Relations Section, Princeton University, 1960
Eckstein, O., “Inflation, the Wage-Price Spiral, and Economic Growth”, in The Relationship of Prices to Economic Stability and Growth (Joint Economic Committee)
Phelps, E. S., “A Test for the Presence of Cost Inflation in the United States, 1955-1957”, Yale Economic Essays, Spring 1961
Samuelson and Solow, “Analytical Aspects of Anti-Inflation Policy”, AER, May 1960
Schultze, C., “The Recent Inflation in the United States”, Study Paper No. 1, Joint Economic Committee, 1959
Selden, R., “Cost-Push Versus Demand-Pull”, JPE, February 1959
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Prof. Modigliani
May 24, 1961
14.05 – ECONOMIC FLUCTUATIONS AND GROWTH
Final Examination
Answer all Questions.
I. Indicate whether the following statements are true or false and give a brief explanation of your answer. Major weight attaches to the explanation. (5 points per question)
(a) The money supply can always be increased through the Federal Reserve open market purchases.
(b) The relation between the two main demand liabilities of the FRB, namely Federal Reserve notes and member bank deposits is determined primarily by reserve requirements.
(c) Inflation will tend to occur whenever the money supply rises faster than productivity.
(d) Liquidity preference helps to explain why the velocity of circulation tends to vary over the business cycle.
(e) If the rate of investment expenditure declines, the stock of capital goods in the economy declines.
(f) Built-in flexibility in fiscal policy means that the level of government expenditure should vary countercyclically.
(g) A high marginal tax rate has a stabilizing effect on the economy by reducing the marginal propensity to consume.
(h) The most important characteristic of a good leading indicator is that it should always turn ahead of general business conditions.
II. (20 points) Given the following information (in billions of dollars per year):
| Full employment income (Yf) | 300 |
| Consumption expenditure | 20 plus 80 percent of disposable income |
| Government purchase of goods and services | 50 |
| Government receipts | 20 percent of national income (Y) |
| Transfer payments | 10 plus 5 percent of the difference between Yf and Y |
| Net investment | 22 |
(a) Calculate the equilibrium level of income implied by this information and explain carefully in what sense it is an “equilibrium” level.
(b) What rate of investment would be required to bring about full utilization of resources? What measures other than an increase in investment could be utilized to reach full employment?
III. (20 points) Define the following concepts:
(a) multiplier
(b) capital coefficient
(c) acceleration principle,
and explain their use in business cycle analysis.
IV. (20 points) Explain the functioning of monetary policy as a stabilization device, and analyze its strength and weaknesses.
Source: Duke University. Rosenstein Library. Robert Solow Papers. Box 68. Folders “Reading Lists”, “Assignments, home problems”, and “Exams, tests, quizzes”.